The Basics of Non-Compete Clauses
Exploring the restrictions in employment agreements.
Most right of way service firms, big or small, wisely use written employment
agreements with their staff members. The agreements spell out details regarding
such things as work expectations, compensation, work place rules and
confidentiality protocols; they also often contain some type of non-compete clause.
As a general matter, the purpose of a non-compete clause is to prohibit an employee from
competing against their employer after the employee ceases work. A right of way firm may
utilize a non-compete clause because they are understandably concerned about protecting the
firm from future competition by a staff member, especially after the firm has spent time and
money educating and developing the employee and exposed that employee to the firm’s clients.
Other times, however, the purpose behind a clause may simply be to stifle any competition at all.
Whether you are an employee, contractor or owner of a right of way firm, it’s important to
have a basic understanding of the limitations and problems relating to such provisions. They
are, indeed, one of the most frequent sources of litigation between firms and their former
professional employees.
An Unforeseen Restriction
In 2007, a land services professional and
expert in geotechnical engineering (let’s
call her Susan) began work with a firm
that provided a broad array of right of
way services and other land services to
government agencies and to oil, gas and
mineral businesses. After several years of
hard work and perseverance, Susan was
promoted to a management position,
and she worked closely with some of the
firm’s top clients.
After five years at the firm, Susan
yearned to start her own business and
to be her “own boss.” She wanted to
capitalize on her recognized expertise
in the field and offer her skills directly
to the same types of government and
oil/gas/mineral companies she was presently serving at the firm. After
deciding to pursue that dream, one
of the first things she did before
leaving her current job was talk with a
lawyer. As they discussed the details,
the topic of current employment
agreements came up. She located the
agreement she had signed a few years
before with her current firm and sent
it to her attorney.
Her heart sank as she read through
several provisions that she hadn’t
given much thought to when she
signed the agreement. The agreement
aimed to restrict her ability to work
in the same industry as her current
employer. In pertinent part, the
agreement stated:
NON-COMPETITION BY
EMPLOYEE. Employee hereby
agrees that employee will not,
during the term of employment,
or for a period of eighteen (18)
months after the termination
thereof, engage directly or
indirectly in a business similar to
Employer’s business, nor associate
therewith in such related business
capacity either as an individual
or a member of a firm or a
shareholder.
INJUNCTIVE RELIEF. In the event
of a breach of any provision
herein, the Employer shall be
entitled, in addition to injunctive
relief provided for herein,
attorney’s fees and liquidated
damages in the sum of $25,000.00
per breach.
Susan’s head was spinning. Do these
sections really mean what they say?
Will her current firm be able to stop
her from working at all in the right
of way/land services business for 18
months after she leaves? And if she
does go forward with starting her
own firm anyway, will her firm really
be able to sue her for $25,000 in “liquidated damages” for every breach?
Is her dream of being her own boss
really a nightmare?
Susan met with her lawyer. He assured
her that in her particular state, the
firm would not be able to enforce the
non-compete against her. Based on
that assurance, she went forward with
her plan, gave notice to the firm and
promptly started her own business–
very much competing against her old
firm. When Susan’s old employer saw
that her business was succeeding, the
firm sued her. Was her attorney right?
Who won the issue in court?
Considerations
To better understand Susan’s
predicament, let’s consider some of
the relevant law. For instance, there’s
the fact that reasonable non-compete
clauses can be enforced in most states
(with the exception of a few, such
as California, Oklahoma and North
Dakota). It is true, however, that they
are “disfavored” by the courts–meaning
that they are construed very strictly
and are subject to key limitations. The
chief reasons for disfavor of noncompete
clauses are that they may
restrict trade and limit free competition
and can make it difficult or impossible
for former employees to earn a living.
As a result, under the laws of most
states, non-compete clauses will only
be enforced when: (1) they protect
legitimate interests of the employer, (2)
they are reasonable in scope, duration
and geographic area and (3) they are
supported by “consideration.” Any
ambiguity will be construed in favor of
the employee.
- Clauses Must Protect Legitimate
Interests of the Employer. A
court must usually find that a
clause protects legitimate interests
of the employer before the court
will enforce it. For example, a
court might consider whether the employee was a key employee or
the "firm’s face" with clients. Did the
employee possess significant confidential
information belonging to the firm? Did
the firm invest significant expense or
resources in providing special education
or training to the employee? When such
factors are in evidence, a court will be
more likely to enforce a non-compete
clause as protecting legitimate interests.
These are the kinds of things that
employers need to be able to show when
justifying that a clause serves to protect
legitimate interests rather than simply
stifle any competition.
- Clauses Must Be Reasonable in Scope,
Duration and Geographic Area. Courts
generally will not enforce agreements
that are unreasonable in the scope of
their restrictions, duration or geographic
area. In making this determination,
courts consider factors such as how
long the restriction will last against the
former employee, whether the restriction
is limited in geographic area, whether
the clause will prevent the employee
from engaging at all in his or her
profession, whether the employee can
find other employment and whether the
restriction on competition will hurt the
public (perhaps by depriving the public
of needed expertise). The determination
of what is "reasonable" depends on the
factual circumstances in each case,
which is part of the reason why noncompete
clauses can lead to expensive
courtroom arguments.
Most states do not have any specific
period of restriction that will
automatically be found reasonable, but
most courts will consider a one-year
non-compete as within the realm of
reason, while a three-year period often
crosses the line. Similarly, most courts
will not enforce a clause when it imposes
a nationwide restriction on competition
by the employee or bars competition
where the employer has no clients or
business interests. Enforceable clauses
need to be drafted with all of these
variables in mind and with attention to
the law in the particular states where the
restrictions will apply.
- Clauses Must Be Supported
by Consideration. In general,
for a non-compete clause to
be enforceable against the
employee, the employee must
have received something of value
in exchange for committing to
the non-compete obligation. In
some states, that value can be
simply the continuation of the
employee’s employment. In other
states, it needs to be something
more substantial. For example,
to be considered supported by
consideration in Minnesota, a
non-compete clause generally
must be agreed to at the beginning
of the employment relationship.
If not, then the employee must
actually have received an increased
benefit (like an increase in pay) in
exchange for the non-compete.
The Result
What happened in Susan’s case? She
won. Her attorney was right, but it cost
her a lot of money in attorney’s fees
to win. After two years of litigation in
federal court, the court ruled that the
non-compete restriction against her was
unenforceable because it too broadly
restricted her ability to work. It was
too long in length, barred competition
in every state and aimed to restrict her
ability to work in any “similar” field as
her former employer.
Perhaps the most important thing to
understand about them is the need to
get legal advice.
While we now understand the general
basics of non-compete clauses,
perhaps the most important thing to
understand about them is the need to
get legal advice. While nearly every
article about a legal topic comes with
a standard admonition that the reader
should consult with his or her own legal counsel, the admonition is
not crying wolf when it comes to
non-compete clauses. For all the
points discussed in this article and
because there is so little uniformity
between the states, if a right of way
firm hopes to have an enforceable
non-compete agreement, the firm
needs the wording to be developed
by a lawyer who is knowledgeable
about the law in those states where
the clauses will apply. From the
employee’s perspective, on the
other hand, the evaluation of a
non-compete clause is probably
more straightforward. An employee
who takes the time to read and
think about the terms of his or
her employment generally will
recognize that a non-compete
clause is not in their self-interest,
unless the employee is receiving a
commensurate benefit.
This article originally appeared in, and is reprinted from, The Right of Way Magazine (April/May 2018). © 2018 by International Right of Way Association, Gardena, CA . Archives of Right of Way magazine, including Peter's past columns, are available at https://www.irwaonline.org/members/publications/archives-2015-present/